Location bonus for new gas power plants in Germany's south carries legal risks – law firm

Extra subsidies for new gas-fired power plants located in the south of Germany carry “significant legal risks” and might prevent EU approval of the government strategy for securing backup capacity, according to a legal opinion commissioned by energy company Leag, which runs coal power plants in Germany’s east. The so-called “South bonus” puts other regions at a structural disadvantage because projects in the north and east have “virtually no chance” to secure contracts, the opinion said, according to Tagesspiegel Background, which has seen the report.  

The new gas-fired power plants are set to cover Germany’s electricity demand at times of little wind and sunshine, securing supply as the country phases out coal. The government plans to incentivise construction with a first round of tenders in September. The South bonus is designed to encourage the construction of two-thirds of the planned new capacity in southern states, where large parts of Germany’s industry are based. 

The EU gave its provisional approval to state aid for the gas plants in January. However, the European Commission is yet to give its final approval. 

While regional differences for state support are allowed, these must be justified by robust and objective criteria, which was not the case in Germany’s draft law, the legal opinion warned.

An analysis by research institute Fraunhofer IEG, meanwhile, found that the “South bonus” could distort the efficient distribution of new gas capacity. “Existing and planned support mechanisms must be better coordinated. Otherwise, there is a risk that the construction of new capacity is obstructed in the north, which is also important for the grid from a technical perspective,” said Fraunhofer researcher Thorsten Spillmann. 

Gas-fired power plants are set to play a major role as Germany exits coal and expands renewables, with the units eventually intended to run on hydrogen. Other flexibility options, such as large-scale batteries or demand management will also play a role. The business case for the new gas plants, which are set to run during brief time periods, can only be guaranteed with additional state support, which is why the government is negotiating a state aid scheme with the European Commission. The EU has strict conditions for member states seeking to provide state support, including in the energy sector.